Can Contingent Convertibles Help Private Asset Managers Fund Their Acquisition of Non-Performing Loans from Portuguese Banks?

May 7, 2019

Preview Citation

Format: Chicago

Andre O Santos. Can Contingent Convertibles Help Private Asset Managers Fund Their Acquisition of Non-Performing Loans from Portuguese Banks?, (USA: International Monetary Fund, 2019) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper analyzes the capital structure of private asset managers in which the acquisition of nonperforming loans (NPLs) is funded with Contingent Convertibles (CoCos) placed with investors. The paper develops a model based on NPL transfer prices and residual recovery rates to assess capital structures consisting of CoCos and equity. The CoCos would contain put and call options to write down losses and write up profits, respectively, arising from liquidation and restructuring procedures. The paper concludes that the protection mechanism provided by debt write-downs embedded in CoCos and the incentives to investors provided by debt write-ups could help bridge the gap between Portuguese banks’ NPL bid prices and private equity firms’ ask prices.

Subject: Banking, Contingent convertible capital, Financial institutions, Financial sector policy and analysis, Loans, Nonperforming loans, Stocks, Taxes, Transfer pricing

Keywords: Asset managers, Asset pricing, Book value, Capital structure, Contingent convertible capital, Contingent convertibles, Coupon rate, Debt write-up, Global, Loans, Maturity date, Nonperforming loans, NPL sale, NPL securitization, Portfolio acquisition, Recovery rate, Stocks, Transfer pricing, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/099
Stock No:

WPIEA2019099
ISBN:

9781498312080
ISSN:

1018-5941

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